Snap flops with disastrous Q3 earnings that send shares diving

Snap badly missed expectations for its third quarter as a public company. Its stock dove as a result.

Snapchat added 4.5 million users, up merely 3% from the previous quarter. A complete redesign of the app is planned to address the stagnant growth.

Snap took a $40 million charge for misjudging the demand for its Spectacles glasses with excess inventory.

Snap Inc's stock plunged in after-hours trading on Tuesday after the company reported a disastrous third-quarter report that revealed widespread weakness throughout the business just nine months after its splashy debut on the public markets.

The company reported smaller than expected user growth, a 60% drop in advertising rates, and a hefty charge due to an overambitious entry into the hardware market.

Additionally, Snapchat's 27-year-old CEO and founder Evan Spiegel acknowledged that the app, while popular with teens and millennials, is too confusing for a lot of other people to use.

Shares of Snap were down roughly 17% at $12.55 in after-hours trading on Tuesday, well below their $17 IPO price earlier this year.

"This quarter was soft across basically every metric as it speaks to a business model which is in a state of major transition since going public," wrote GBH Insights analyst Dan Ives in a note to investors following Tuesday's earnings report.

Investor patience, he said, is "starting to wear very thin."

Here are the key numbers from Snap's Q3 earnings:

Revenue: $207.9 million, up 62% year-over-year, but below the $235.5 million expected by analysts.

Earnings per share (adjusted): Net loss of $0.14 vs. $0.15 expected

Daily active users: 4.5 million new users for a total of 178 million, up 3% from Q2.

Falling ad prices and weak user growth

Snapchat added only 4.5 million new users versus the 8 million expected by analysts for the quarter, a sign that its growth is continuing to slow under mounting competitive pressure from Facebook-owned Instagram.

Snap said that its shift to programmatic advertising earlier this year has "made it harder to grow revenues at the rate we would have liked," with its ad rates dropping sharply by 60% from the year-ago period. Overall ad impressions were up sharply as Snapchat opened up its app to automated advertising services.

To kick-start user growth, CEO Evan Spiegel said that the Snapchat app would be redesigned to make it "easier to use," a change the company predicts to "be disruptive to our business in the short term."

Snap has already had multiplerounds of layoffsand plans to slow hiring in 2018, according to an internal email sent by CEO Evan Spiegel to employees andobtained by Business Insider last month. The company had $2.3 billion in available cash at the end of the third quarter but has significant business costs to contend with, like its $2 billion, five-year commitment to use Google's cloud hosting service.

Business Insider covered the highlights from Snap's earnings call with executives below:

Snap's earnings call is about to begin. It will be interesting to hear how executives position the quarter in light of the poor results.

Here's a chat showing Snapchat's quarterly daily user growth:

Snapchat has historically been buggy on Android phones, but Spiegel said that the app is now 20% faster to open. And Snap has opened a device test lab to improve its Android performance. (I've heard that Spiegel himself carries an Android phone around these days.)

80% of ads on Snapchat are delivered programmatically now, up from 60% in the previous quarter. But CPMs have also dropped 60% from the year-ago period, "which has made it harder to grow revenues at the rate we would have liked," per Spiegel.

Spiegel admitted that the 4.5 million new users is a lower growth rate "than we would have liked."

"To attract more Android users, we are building a new version of our Android application from the ground up that we will launch in select markets before rolling it out widely," according to Spiegel. "This new version of our application leverages everything we have learned about building for Android 4 over the past five years, to provide a more performant product experience that we know our community will appreciate."

Snapchat has historically been difficult to use by design. That's changing. Spiegel said that a complete redesign is in the works to kick-start growth. Sounds like the redesign will surface more of the crowdsourced 'Story' videos that Snapchat now buries in the search field.

Spiegel said that Snap is "exploring partnerships with select wireless carriers who can help us to provide our service at a lower cost" in countries where high-speed internet isn't widespread. The company has traditionally not bothered to invest in emerging markets like Facebook.

Spiegel touted the success of NBC's Snapchat news show, "Stay Tuned" with 12 million viewers between the ages of 12 and 24. But it doesn't look like Snap's nascent show strategy is paying off for the bottom line yet.

Spiegel finally admitted that Snap has "historically neglected the creator community on Snapchat." Now the company plans to lure Instagram, YouTube, and ex-Vine stars with special perks and ways to make money.

Snap is working on a way for anyone to create their own 3D augmented reality filters, which the company calls Lenses. The artist Jeff Koons recently partnered with the app to show some of his artwork virtually through its camera.

Snap's shift to programatic ads is hurting its revenue growth now, but the company hopes to rebound. "As we transition more and more of our business to the auction, this had a meaningful impact on overall pricing," said chief strategy officer Imran Khan. "While this diminishes revenue in the short term, it builds the foundation for long-term scalable revenue."

Snap's average revenue per user, a key metric Wall Street is judging it by, grew to $2.17 in North America for the quarter. By comparison, Facebook's North American ARPU was $21.20 last quarter.

Ouch: Snap charged itself $39.9 million for excess inventory from its Spectacles glasses. "Moving forward, we will continue to be in the market place with Spectacles and expect modest revenue from the product line," said CFO Drew Vollero.

Vollero says that Snap's "pace of hiring" will "slow in the short-term."

On Snapchat's upcoming big redesign:

"We've been spending a lot of our time studying the history of content feeds on mobile," Spiegel said in response to question about Snapchat's forthcoming redesign. He explained how Twitter was the first mobile content feed and then Facebook added friends to the feed concept with the News Feed.

He said there's a "really exciting opportunity" for a new kind of feed that address some of the "shortcomings of the friend-based content feed model." Namely, when people add more friends over time like they do on Facebook, they feel less comfortable sharing more. Spiegel thinks that Snap will solve that problem.

"Our audience may not be the largest today, but we definitely feel that it's the most strategic."

That's Spiegel's ethos about user growth in a nutshell. While Facebook is focused on connecting the world and bringing internet service to developing countries, Snap wants to focus on people in more monetizable markets like North America and Europe. But as Snap has found with its historical negligence towards Android, not catering to everyone can come back to bite you later.